Article by Elias Farah & Erin Freebairn

What is a Sunset Date?

You would be aware of properties sold “off-the-plan” when looking at projects comprising apartments, and more recently when involving new homes (often townhouses).

Buying off-the-plan is when a buyer enters a contract to acquire property prior to completion or construction of the dwelling and/or registration of the plan of subdivision.

A sunset date is typically the maximum time permitted in the contract by which the project must be completed by the developer. If the project is not completed by the sunset date, then the contract can usually be terminated by either party without penalty and with the deposit refunded to the buyer.

The sunset date is usually a relatively conservative date and off-the-plan contracts are typically completed before the sunset date to ensure that the buyer does not terminate during the development. Allowing additional time provides a contingency for unforeseen delays and for appeasing the risk requirements of financiers.

When the stipulated sunset date accounts for potential risks, it may occur well after the exchange of contracts, anywhere from two to five years. Despite this, however, the price of the property is locked in at the time of the contract exchange and will remain the same until settlement, irrespective of any changes in the market.

During the development period, particularly if it is over several years, the market value of the property can fluctuate. As a result, a buyer may purchase a property that is worth a lot more than they paid for it by the time it is completed due to shifts in the market.

What does this mean for buyers and developers?

This is great for the buyer but in the current market, whereby the cost to build is consistently on the rise, developers may be contracted to projects that no longer generate a sufficient profit or may even, in some cases, result in a loss.

This is a great result for a buyer, in the current market whereby the cost to build has continued to rise as market values rise, developers can be faced with projects that no longer make sufficient profit, or in some cases, may make a loss.

In these cases, developers may be looking for a trigger to vary contractual terms, to either increase the original purchase price or terminate the contract entirely. In doing so, developers will be seeking to protect themselves from burgeoning building costs but also to take advantage of the new market value of the contracted property. Ideally, achieving a revised price increases the developer’s revenue which offsets their increased expenses and balances the developer’s original profit forecasts. 

In our experience, when developers choose this course of action, it massively impacts innocent buyers; disappointing people who have been patiently waiting for the completion of their properties. Worse still, in come cases, the buyer may even lose out on recent homebuilder grants or, due to the increase in property values, struggle to find their way back into the property market altogether. Consequently, it’s reasonable to expect those injured buyers to dispute the developer’s rights to terminate their contract. We note that in most cases, however, contracts typically favour the developer over the buyer.

This becomes an issue in scenarios where developers are not acting to recover costs but are instead taking advantage of the market purely to increase profits when they are confident in the increased resale price of their property. Already, we have seen this happen in the Eastern states where NSW, ACT and VIC have introduced new legislation that prevents developers from exploiting sunset date clauses to unreasonably terminate contracts partway through the construction process.

According to this legislation, if a developer seeks to terminate a contract because they are unable to complete the project before the sunset date, they are required to give notice to the buyer. In turn, the buyer must provide a written agreement to terminate the contract before the developer can proceed. The process requires developers to provide the buyer with a clear and compelling explanation as to why the project cannot be completed by the sunset date. If the buyer does not agree with the developer’s reasoning, the developer must obtain an Order from the Supreme Court to proceed with terminating the contract.

What can be done about it?

South Australia is yet to implement any legislation like that in the Eastern states. While property market value and building costs continue to escalate and developers are increasingly reliant on using sunset clauses as a justification for terminating contracts, however, we consider it likely in the near future the South Australian Government will have to consider following the lead of neighbouring states and introduce the same sort of legislation.

We have been made aware of several complaints already made to South Australian Government Representatives that highlight the negative impact on buyers who have suffered, through no fault of their own, because of terminated contracts.

Advice for buyers and developers

It is our view that there should always remain an option for developers to terminate when sunset dates cannot be achieved because removing this right altogether would create other problems for developers that would surely, in some cases, lead to insolvency. That said, there should be an effort to balance the power of this necessary right for developers to ensure the protection of public interest against termination for financial gain.

We recommend that buyers understand and consider the nature of sunset clauses and sunset dates before executing their contract. Similarly, we recommend that when developers are commencing a new project, they take into consideration the possibility of new legislation that will have an impact on the effect of sunset clauses.